1 Clarifying Costs: Can Increased Price Transparency Reduce Healthcare Spending? Morgan A. Muir,* 1 Stephanie A. Alessi,** 2 and Jaime S. King*** 3 As healthcare expenditures continue to climb, politicians, business leaders, and patients avidly search for new methods to reduce healthcare costs. In an eleven-point plan released in 2012, a group of the nation s top healthcare experts listed full transparency of prices as one potential solution to reduce healthcare costs. The experts, some of whom helped write the Patient Protection and Affordable Care Act, argued that price transparency would allow consumers to compare prices before choosing a provider or hospital and, consequently, better anticipate their overall costs. In turn, they argued that making price information publicly accessible would also reduce excess healthcare spending by encouraging providers to offer more competitive pricing. Other health services research, however, suggests that legislative and regulatory efforts to promote price transparency may result in increased healthcare costs depending on the market conditions and the various stakeholders targeted. Consequently, any price transparency initiative must not only make prices transparent, but also account for the differences between markets, either by reducing the economic inefficiencies that keep price transparency from being effective or by precisely targeting the specific regions where the market would support such an initiative. This article analyzes whether price transparency initiatives can effectively reduce healthcare costs, and if so, what conditions must exist for them to do so. The features of a welldesigned price transparency initiative will vary depending upon the targeted population (patients, employers, providers, or insurers) and the particular features of the target market. We argue that the most effective solutions will mandate disclosure of price and quality information at the appropriate stakeholder levels and, simultaneously, break down provider market leverage where it prevents price transparency from helping consumers. Together, these two elements have the potential to lower healthcare costs. Finally, we present four possible price transparency initiatives that represent a range of possible alternatives,including litigation, legislation, regulation, and consumer driven initiatives. TABLE OF CONTENTS I. INTRODUCTION 320 II. THE HEALTHCARE MARKET AND PRICE TRANSPARENCY III. CONSUMER-LEVEL PRICE TRANSPARENCY *1 Research Fellow, UCSF/UC Hastings Consortium on Law, Science and Health Policy; Attorney, Morgan Muir Law. **2 J.D., University of California, Hastings College of the Law; Research Fellow, UCSF/UC Hastings Consortium on Law, Science and Health Policy. ***3 Professor of Law, University of California, Hastings College of the Law and Associate Director of the UCSF/UC Hastings Consortium on Law, Science and Health Policy. All authors would like to thank David Faigman, Clay Johnston, Tim Greaney, Ann Marie Marciarille, and Adams Dudley for their thoughtful contributions to earlier drafts of this article.
2 2013] CLARIFYING COSTS 320 A. IMPLICATIONS OF PRICE TRANSPARENCY B. BARRIERS TO CONSUMER-LEVEL PRICE TRANSPARENCY IV. INSURER-PROVIDER LEVEL PRICE TRANSPARENCY A. EFFECTS OF PRICE TRANSPARENCY AT THE INSURER-PROVIDER LEVEL B. BARRIERS TO INSURER-PROVIDER PRICE TRANSPARENCY V. EMPLOYER-LEVEL PRICE TRANSPARENCY A. EMPLOYER-SPONSORED HEALTH INSURANCE B. BARRIERS TO EMPLOYER-LEVEL PRICE TRANSPARENCY VI. CURRENT TRANSPARENCY INITIATIVES A. CALIFORNIA LAWS AND CURRENT TRANSPARENCY INITIATIVES B. OTHER STATE INITIATIVES C. EXISTING INITIATIVE EFFECTIVENESS VII. POTENTIAL SOLUTIONS TO PROMOTE EFFECTIVE PRICE TRANSPARENCY A. LEGISLATIVE SOLUTIONS B. REGULATORY SOLUTIONS C. EMPLOYER AN CONSUMER EDUCATION INITIATIVES VIII. RECOMMENDATIONS A. "VISIBLE VALUE" STANDARD CERTIFICATION B. EMPLOYER-LED LEVERAGE FLIP C. HEALTHCARE MARKET REGIONS D. ANTITRUST LITIGATION AND LEGISLATION/REGULATION IX. CONCLUSION I. INTRODUCTION In 2011, the United States spent $2.7 trillion dollars on healthcare. 4 National healthcare expenditures accounted for 17.9% of the gross domestic product and have nearly doubled since In recent years, American businesses have begun to falter under the weight of providing affordable insurance to their employees, and the number of uninsured Americans has increased to over 46 million. 6 The need to reduce healthcare costs is more apparent than ever and the Affordable Care Act has brought numerous cost-reduction initiatives to the forefront. In August 2012, several of the nation s top healthcare experts who helped write the Affordable Care Act (ACA) included price transparency in an eleven-point plan to reduce health costs. 7 They argued that price transparency would permit consumers to compare available prices and anticipate overall costs before choosing a provider or hospital. 8 In turn, publically accessible price information would encourage providers to offer more competitive pricing and 4 CTRS. FOR MEDICARE AND MEDICAID SERVS., NATIONAL HEALTH EXPENDITURES 2011 HIGHLIGHTS, available at Reports/NationalHealthExpendData/ Downloads/highlights.pdf (last visited February 11, 2013). 5 Id. 6 ROBIN A. COHEN & MICHAEL E. MARTINEZ, NAT L CTR. FOR HEALTH STATISTICS, CDC, HEALTH INSURANCE COVERAGE: EARLY RELEASE OF ESTIMATES FROM THE NATIONAL HEALTH INTERVIEW SURVEY, 2011, at 2 (2012) [hereinafter 2011 NATIONAL HEALTH INTERVIEW SURVEY], available at earlyrelease/insur pdf. 7 Ezekiel Emanuel et al., A Systemic Approach to Containing Healthcare Spending, NEJM, Aug. 1, 2012, available at 8 Id.
3 321 WILLIAM & MARY POLICY REVIEW [VOL. 4:319 thereby reduce excess healthcare spending, a view consistent with predictions of standard economic theory. 9 However, whether price transparency will have this effect on the healthcare market remains speculative. Those who believe price transparency alone will reduce healthcare costs assume that the healthcare market will respond like other industries. Economists have long concluded that markets work best when consumer prices reflect the actual cost to create and deliver the product. 10 In fact, a majority of the empirical studies on price transparency in other markets shows that transparency initiatives tend to lead to more consistent, lower prices. 11 While similarities exist between healthcare and other consumer markets, some economists believe price transparency will not ameliorate rising healthcare costs due to unique characteristics of the healthcare market. 12 One major difference is that patient demand for healthcare services generally does not respond in the same manner as consumer demand for other goods in terms of price elasticity, which estimates how consumer demand changes as price changes. 13 Consumers can delay healthcare due to cost, but once a condition becomes severe or life threatening, consumers will generally seek care regardless of price. This makes the demand for certain healthcare services uniquely inelastic. Price inelasticity in the healthcare market is further exacerbated by the fact that consumers generally learn of their healthcare costs after receiving care, making these costs seemingly unavoidable. In addition, complex billing practices, secretive insurer-provider contracts, the sheer number of third party payers, and major quality variances in delivery of healthcare may mean that it will be difficult for price transparency initiatives to achieve economic efficiency. 14 Unfortunately, the unique characteristics of this market make analogies and predictions based on other markets less reliable. Each unique quality of the healthcare market is analogous to another market, but no one market contains all of the special characteristics of healthcare. Loosely analogous to corporate managers, who make business decisions that affect the price of stockholders shares, are providers, who negotiate with insurers over covered treatments and procedure prices and also make recommendations that drive patient demand for the same procedures. Thus, a price transparency initiative that targets consumers alone may be less effective than a multi-faceted one that targets decisions made at the insurer-provider level as well. Similar to the automobile and airline industry, price discrimination can affect healthcare prices when providers charge different payers different prices for identical services, adding to the growing price discrepancies for healthcare within the same geographic region. 15 Further, third party payers insulate consumers from the full price of healthcare, allowing price to play less of a role in treatment choice than location, physician quality, or other non-price factors. 9 Id. at 2 4; see also CRS REPORT FOR CONGRESS: DOES PRICE TRANSPARENCY EFFECT MARKET EFFICIENCY? IMPLICATIONS OF EMPIRICAL EVIDENCE IN OTHER MARKETS FOR THE HEALTHCARE SECTOR (Apr ) [hereinafter CRS REPORT FOR CONGRESS]. 10 Robert Murray, Setting Hospital Rates to Control Costs and Boost Quality: The Maryland Experience, 28 HEALTH AFF. 1395, 1397 (2009). 11 CRS REPORT FOR CONGRESS, supra note 9, at Id. at Su Liu & Deborah Chollet, Price and Income Elasticity of the Demand for Health Insurance and Health Care Services: A Critical Review of the Literature Final Report, Mathematica Policy Research, Inc. (Mar. 24, 2006). 14 CRS REPORT FOR CONGRESS, supra note 9, at Uwe E. Reinhardt, The Price of U.S. Hospital Services: Chaos Behind A Veil of Secrecy, 25 HEALTH AFF. 57, 58 (2006).
4 2013] CLARIFYING COSTS 322 Over 30 states are currently considering or pursuing legislation to increase price transparency. 16 To date, most transparency initiatives have targeted consumers. However, initiatives targeting the insurers, providers, and employers may prove more effective. This article analyzes the current debate about price transparency in the healthcare market and the role that law and policy play in the implementation of price transparency initiatives to lower the cost of healthcare. The analyses herein will critique existing price transparency initiatives and examine ideas for new initiatives that may benefit the healthcare market today. Part II provides information on the healthcare market as it relates to price transparency and presents different potential price transparency intervention points. Parts III, IV, and V examine initiatives directed at these intervention points the consumer, insurer-provider, and the employer levels, respectively in more depth. For each intervention point, the article analyzes the potentially substantial legal barriers and other obstacles to price transparency. Part VI examines current transparency legislative initiatives across the country with a special focus on California as well as the potential for regulation from the Health Benefit Exchanges. Part VII then analyzes a range of possible price transparency initiatives aimed to effectively target each specific intervention point, including consumer and employer education, antitrust litigation, state legislation, and state agency regulation. These potential solutions serve as a framework for analyzing price transparency initiatives, accounting for varying healthcare market conditions, differences in legislation and regulations on price transparency across the country, and the range of market barriers and legal hurdles discussed in each Part. Lastly, based on the analysis in Part VII, Part VIII recommends four possible legal, regulatory, and educational solutions that might be taken alone or in combination to form an effective price transparency initiative. By offering several potential solutions to simultaneously reduce anticompetitive behavior in healthcare markets and make price and quality information available in a meaningful way, these proposals provide healthcare consumers a viable path toward fair and visible prices. 17 II. THE HEALTHCARE MARKET AND PRICE TRANSPARENCY According to the Centers for Disease Control and Prevention (CDC) National Center for Health Statistics (NCHS), an estimated 46.3 million persons of all ages (15.1% of the United States population) were uninsured in Sixty-four percent of insured persons were covered by private health insurance plans 82.1% of those persons obtained employer-based coverage, while 15.3% purchased their plan independently of their employers. 19 The price of healthcare goods and services carries a different meaning depending on the targeted party. Whereas co-pays and monthly premiums matter most to individual consumers, healthcare providers are most affected by reimbursement rates paid by private and public health 16 Anna D. Sinaiko & Meredith B. Rosenthal, Increased Price Transparency in Healthcare Challenges and Potential Effects, 364 New Eng. J. Med. 891, 891 (2011). 17 While the analyses and recommendations provided herein use California as the target case study, many of the issues also pertain to markets in other states across the country. 18 ROBIN A. COHEN & MICHAEL E. MARTINEZ, NAT L CTR. FOR HEALTH STATISTICS, CDC, HEALTH INSURANCE COVERAGE: EARLY RELEASE OF ESTIMATES FROM THE NATIONAL HEALTH INTERVIEW SURVEY, 2011, at 2 (2012) [hereinafter 2011 NATIONAL HEALTH INTERVIEW SURVEY], available at earlyrelease/insur pdf. 19 U.S. CENSUS BUREAU, CURRENT POPULATION SURVEY, ANNUAL SOCIAL AND ECONOMIC SUPPLEMENT (2012), available at
5 323 WILLIAM & MARY POLICY REVIEW [VOL. 4:319 insurers. Therefore, revealing certain healthcare costs to the wrong party will not be as useful or as effective in lowering healthcare costs as a more appropriately targeted approach. Insurers, providers, employers, and individual consumers are all potential targets for price transparency initiatives. Price information aimed at facilitating competition between providers or insurers differs from information aimed at providing guidance to consumers. To illustrate these potential points of intervention for transparency initiatives, consider the following example of an MRI: Provider A s gross charge for an MRI is $2, However this is not the price an insurer pays, or the price for which the insured consumer is responsible. For this MRI, Provider A has negotiated a rate of $1,000 with Insurer X and a rate of $1,500 with Insurer Y, but Patient B will pay a copay of $50 with Insurer X or a 10% co-insurance of $150 with Insurer Y. The effect of any particular price transparency initiative will depend significantly on the targeted entities, the relevant market conditions, the usefulness of the information disclosed, and the ability of the targeted entity to act on that information. A well-designed price transparency initiative that takes into account these factors can reduce healthcare costs, while others will have little effect, or worse, could increase healthcare costs. The following sections demonstrate different price disclosures at each of the consumer, insurer-provider and employer levels, and their impact. III. CONSUMER- LEVEL PRICE TRANSPARENCY The goal of consumer-level price transparency is to create better-informed consumers of healthcare. 21 The hope is that well-informed consumers will use easily accessible and comprehensible price and quality information to purchase lower-priced, higher-quality healthcare, thereby changing market demand and lowering overall prices. Consumers of healthcare include both individual persons and employers who purchase healthcare benefits for employees. This section focuses on the individual consumer, while Part IV tackles the issues surrounding employer-level price transparency. Consumer-directed price transparency initiatives can mandate disclosure of prices at two points: 1) individuals at the point of plan selection; and 2) individuals at the point of provider/treatment selection. While many existing consumer-level transparency initiatives target individuals, these initiatives have had only moderate levels of success because patients do not have access to complete price and quality information in an easily comprehensible and usable format. 22 Price transparency at the individual consumer level concerns the amount of payment for which the consumer is responsible. For uninsured consumers, the price of care is also the same as the total payment to the provider. However, for insured consumers the price they pay for care often represents only a small fraction of the overall cost; the insurance plan will pay for the rest, often at negotiated and discounted rates. Prior to selecting a health plan, individuals typically receive information on the different pricing structures associated with various insurance companies. Access to meaningful price and quality comparison data would enable consumers to carefully evaluate health plans before becoming a customer. Historically, at the point of plan selection, consumers have had access to plan premiums, deductible, and coinsurance amounts. 20 The gross charge for a medical procedure is the price billed to uninsured consumers. This amount is often different from the actual price recovered by providers. 21 Id. at JH Hibbard & E Peters, Supporting Informed Consumer Health Care Decisions: Data Presentation Approaches That Facilitate the Use of Information in Choice, 24 ANNUAL REV. PUB. HEALTH 413,
6 2013] CLARIFYING COSTS 324 However, as more individuals move into high deductible health plans (HDHPs), consumers will have to pay the actual prices of specific services out of pocket, making provider costs also relevant to plan selection. Once enrolled in a health plan, consumers will require additional information regarding the price tiering of providers within their chosen plan, such as whether certain providers will require a higher level of coinsurance or copay. Price transparency initiatives targeting individual consumers should offer access to provider reimbursement rates that, along with provider quality information, can assist consumers in plan and provider selection. Unfortunately, providing meaningful price and quality information in a usable format for individual consumers has proven very challenging. Attempts to do so have resulted in only marginal consumer uptake. 23 A. IMPLICATIONS OF CONSUMER-LEVEL PRICE TRANSPARENCY Economists and health policy scholars have debated the effects of transparency on the healthcare market for years. 24 While traditional economic theory argues that access to meaningful information in any market will result in a decrease in product cost, 25 others caution that, in the healthcare market, price transparency may result in unintentional effects, including price increases, if not implemented properly. 26 This Part describes these different theoretical effects and considers the reasoning behind each in order to better craft an economically efficient initiative. In 2008, Congress commissioned the Congressional Research Service (CRS) to examine the effect of greater price transparency on the healthcare market. 27 The CRS ultimately concluded that greater price transparency might lead to lower prices. 28 In preparing the Report, CRS examined several empirical studies on price transparency in other markets and several economists opinions on what these studies predict for the healthcare market. Generally, the Report concluded that if the healthcare market reacts to price transparency in the same way as other markets, then increasing the transparency of price information available to consumers will improve competition and drive down prices. 29 On the other hand, because of the special characteristics of healthcare, the Report also warns that increasing price transparency may increase prices in certain situations. 30 Michelle Kim, a PhD in healthcare management and economics, also uses economic theory to examine the effect of transparency measures on the healthcare market. 31 Her 23 CRS Report for Congress, supra note See, e.g., JH Hibbard, J Stockard, and M Tusler, Does publicizing hospital performance stimulate quality improvement efforts?, HEALTH AFFAIRS, 2003; 22(2): (demonstrating that the debate about transparency in the healthcare market goes back at least a decade). 25 Cutler & Dafny, supra note 36, at Id. at 894; see also Sinaiko & Rosenthal, supra note 16, at CRS Report for Congress, supra note Id. at CRS REPORT FOR CONGRESS, supra note 9, at 39 (citing Per Baltzer Overgaard, Market Transparency, Information Exchange and Competition, presented at the workshop on Competition Strategies and Competition Law, Swedish School of Economics and Business Administration, Helsinki, Oct. 14, 2003, available at 30 CRS REPORT FOR CONGRESS, supra note 9, at 38 (citing Morten Hviid & H. Peter Møllgaard, Univ. of Copenhagen, Dep t of Econ., Countervailing Power and Price Transparency (Ctr. for Competition & Regulation, Working Paper CCR 01-2, 2001) (arguing when less informed buyers can observe prices negotiated by more informed buyers, sellers are less willing to offer lower prices to the informed buyers)). 31 Michelle Kim, The Effect of Hospital Price Transparency in Healthcare Markets (2011) (Ph.D. dissertation in Health Care Management and Economics, University of Pennsylvania).
7 325 WILLIAM & MARY POLICY REVIEW [VOL. 4:319 dissertation focused on the clearinghouse model for transparency. This model focuses on the effects of consumers who have access to a list of prices charged by different sellers in a market, and assumes that informed consumers with access to such a list will choose the lower-cost products, whereas uninformed consumers without access will purchase products in the market at random. 32 Kim reports the effect of healthcare price transparency on (1) market share, (2) market efficiency, and (3) price sensitivity among medical care consumers. 33 In terms of market share, Kim states that if more informed consumers search for the lowest priced providers, the market will experience a shift in consumers away from fee-for-service plans. 34 However, Kim notes the difficulty of providing price and quality information to consumers in one central location, as opposed to piecemeal reporting of quality information on one website and price on another. 35 Without quality information available in the same location as price information, Kim suggests that consumers will be unable to choose lower-priced providers. 36 Instead, consumers will continue to equate cost with quality, likely causing prices to remain constant, if not increase. 37 Kim s results for consumer price sensitivity suggest that increased price transparency in a cost sharing system will lead to a reduction in healthcare expenditures, but only if it is possible to provide cost and quality information together so that consumers can understand the true value of services before receiving them. 38 At the consumer level, many empirical studies of consumer-directed transparency initiatives have reported little to no effect on healthcare prices. 39 If these consumer-targeted initiatives have any hope of affecting the healthcare market, it will be essential to link quality to price and to present consumers with this information in a useful and easily digestible format. Otherwise, an initiative could have no effect or worse, increase costs through collusion, for example. 40 To avoid the potential for an increase in healthcare costs, David Cutler and Leemore Dafny argue that disclosing more limited price information, such as average provider reimbursement rates instead of complete cost information, may make price cuts to certain insurers less detectable, collusion efforts more difficult, and prices less likely to rise. 41 But, while the disclosure of average prices reduces price secrecy, such limited disclosures will not be sufficient to also affect patient healthcare decisions. In practice, average prices can depict such an expansive range that consumers are often unable to draw helpful price comparisons among providers. Further, limited disclosure cannot capture the many variables that affect price variation including condition severity, geographic location, and quality of provider that will inevitably affect price. 42 While research on the effects of price transparency often generates mixed predictions and unknown results, one consistent conclusion prevails: Making price information publicly 32 Id. at Id. at Id. at Id. at Id. at Id. at Id. at 66. Note that Kim s study used charges billed and not actual out-of-pocket costs. 39 See, e.g., supra Part V.A See, e.g., supra Part III.A, discussing the potential for increased costs due to price transparency at the insurerprovider level. 41 Cutler & Dafny, supra note 36, at The limitations of average price disclosure are discussed in more detail in Part IV.B.
8 2013] CLARIFYING COSTS 326 available must be done with extreme care in order to begin to shape healthcare decision-making and avoid unwanted price increases. B. BARRIERS TO CONSUMER-LEVEL PRICE TRANSPARENCY Unfortunately, even well thought-out price transparency initiatives face significant barriers to success. At the consumer level, trade secrets protections, contractual barriers, general provider resistance, the question of whether consumers will seek out available price information, and complex cost-shifting and complex billing practices in the healthcare market create hurdles to achieving price transparency that must be cleared before implementing a successful initiative. Trade secret protections, contractual barriers, and provider resistance will be addressed in the following section. This section on consumer based-initiatives will address consumer usage, and complex cost-shifting and billing practices. 1. QUESTIONABLE CONSUMER USAGE Even if a health policy initiative were successfully enacted, many health policy experts warn that consumers may not use this information in the ways previously described. 43 If consumers will not comparison-shop for their healthcare like they do for other consumer products, making healthcare prices readily available to consumers will have very limited effects on healthcare spending. 44 Major changes in healthcare billing practices may need to occur before transparency aimed at consumers can be expected to drive down the cost of healthcare. 45 Uwe Reinhardt, Professor of Political Economy and Economics at Princeton University in the area of health policy, has argued that consumer-directed reforms cannot positively impact the healthcare industry unless hospital billing practices are reformed to allow consumers to readily understand how and for what services they will be charged. 46 The current chaotic system of hospital pricing would, if made completely transparent to the public, be akin to forcing sick and anxious people to shop around blindfolded for cost-effective care. 47 Because prices negotiated with hospitals vary more than prices negotiated with providers, regulating hospital pricing structures should be a priority. 48 Effective consumer-directed price transparency will require translating the complicated language of healthcare billing into easy-to-understand information if consumers are expected to utilize that information in their decision-making. 49 Even if hospital prices became more user-friendly and readily available, consumers may not use it when making decisions about where to receive treatment and from whom. Health services research demonstrates that patients are more likely to base treatment decisions on the experiences of friends and family members than cost. 50 Further, in the absence of accessible and comprehensible quality information on providers, patients may inaccurately equate lower prices with lower quality services, defeating the purpose of price transparency. 43 GAO REPORT ON PRICE TRANSPARENCY, supra note 67 (citing CRS REPORT FOR CONGRESS, supra note 9); Ginsburg, supra note 73, at 211 (stating consumers will not use information they do not understand). 44 GAO REPORT ON PRICE TRANSPARENCY, supra note 67 (citing CRS REPORT FOR CONGRESS, supra note 9); Ginsburg, supra note 73, at 211 (stating consumers will not use information they do not understand). 45 Reinhardt, supra note 15; see also infra Part IV.A Reinhardt, supra note Id. at Ginsburg, supra note 73, at See CATALYST FOR PAYMENT REFORM, supra note 35, at Anna D. Sinaiko, How Do Quality Information and Cost Affect Patient Choice of Provider in a Tiered Network Setting? Results from a Survey, Health Serv Res Apr: 46(2):437 56, 451; see also Henry J. Kaiser Family Foundation, National Survey on Americans as Health Care Consumers: An Update on the Role of Quality Information, (Menlo Park, Calif.: Kaiser Family Foundation, 2000).
9 327 WILLIAM & MARY POLICY REVIEW [VOL. 4:319 Ultimately, a consumer-directed initiative alone cannot change the course of healthcare spending. In the right circumstances, initiatives aimed at increasing transparency of prices at the provider-insurer level are more likely to reduce costs. Therefore, whether consumers become more informed purchasers of healthcare as a result of a price transparency initiative is not dispositive of the effectiveness of price transparency overall. However, a consumer-targeted initiative may be a helpful piece of a larger price transparency strategy, so long as consumers are able to understand and effectively use price information in their decision-making processes. 2. COMPLEX COST-SHIFTING AND BILLING PRACTICES Complicated healthcare billing practices also pose additional challenges to the implementation of effective consumer-based price transparency measures. The complex series of cost-shifts in the healthcare industry from the insurer, through multiple providers, to the consumer also contributes to potential difficulties for individual consumers and employers in obtaining complete price information. 51 For hospital procedures, both in- and out-patient services, the billing passes through multiple providers, e.g., the anesthesiologist, surgeon, and the hospital. Provider networks can minimize some complexity, as insurers have access to innetwork prices in advance based on their contractual relationship with those providers. But as soon as a patient sees one out-of-network provider in the chain, estimating costs in advance becomes more problematic. Questions of consumer usage and complex billing practices must be addressed as part of launching an effective consumer-based price transparency initiative. However, before consumers can access the information, numerous barriers must be overcome to obtain price information from insurers and providers. Each presents a formidable challenge to implementing effective price transparency initiatives and will be discussed in further detail in Part IV. IV. INSURER-PROVIDER LEVEL PRICE TRANSPARENCY Between insurers and providers, numerous legal and practical mechanisms prevent disclosure of negotiated price terms that hinder price transparency. Currently, confidentiality clauses and so-called gag clauses in provider-insurer contracts ensure that knowledge of negotiated prices stay between the parties in privity of contract. 52 Insurers and providers may also seek to protect the confidentiality of their prices as a trade secret. Lastly, providers may simply resist any price transparency initiative that may compromise their bottom line. As a result, third party insurers, providers and consumers are kept in the dark as to the prices being charged and collected. Using the illustration introduced above, Provider A charges Insurer X a lower rate than it charges Insurer Y. However, because the contract price terms between Provider A and Insurer X are protected by a gag clause, Insurer Y is unable to use those price terms to negotiate a lower rate with Provider A. Mandating price transparency of negotiated rates at the insurer-provider level may facilitate more competitive pricing by allowing Insurer Y to use its knowledge of the contract with Insurer X to negotiate a lower rate. This would, in theory, drive down overall healthcare costs as competitors would be able to use their knowledge of these prices to increase their bargaining leverage and negotiate for lower prices. A. EFFECTS OF PRICE TRANSPARENCY AT THE INSURER-PROVIDER LEVEL However, theory may not always turn into practice. Unlike its conclusions on the effects of consumer-level price transparency, CRS warned that, because of the special characteristics of 51 CRS REPORT FOR CONGRESS, supra note 9, at See infra Part IV.A.
10 2013] CLARIFYING COSTS 328 healthcare, increasing price transparency might increase prices at the insurer-provider level. 53 For instance, the same report on the effects of consumer-level price transparency highlights the effects of price transparency on the airline industry, which, like the hospital industry, has high fixed costs and a non-storable product. 54 After the Airline Deregulation Act of 1978, increased competition led to lower fares for consumers and lower salaries for many employees. The most valuable components of the industry, however, such as pilots and mechanics, like highly specialized surgeons in healthcare, did not experience a salary reduction. 55 The Report concluded that well-designed price transparency initiatives, however, could improve efficiency, while permitting innovative and highly valued providers to remain highly compensated. 56 However, pilots do not have a similar ability to stimulate demand for their services in the way that surgeons do, which can continue to lead to higher overall costs. Cutler and Dafny similarly analogize to other markets in order to analyze the potential effects of price transparency on the healthcare market. 57 Their article on increased price transparency looks to the Danish ready-mix concrete industry in the early 1990s, where Danish authorities implemented a price transparency policy against suspected anticompetitive practices by publishing actual invoice prices. 58 Within one year from the dissemination of that information, average prices in the industry rose 15 to 20%. 59 The most likely explanation for the price increase is that publishing transaction prices quickly revealed competitor price cuts, which made it easier for ready-mix concrete firms to avoid competition. 60 Given the varied hypotheses and dearth of actual studies, the effect of price transparency on the healthcare market remains largely uncertain. It seems at least possible that some price transparency initiatives could lower healthcare costs in certain markets, but this may be merely one piece to the larger transparency puzzle. Initiatives targeted at providing greater transparency between insurers and providers could, on one hand, inspire providers to raise prices to a uniform or near uniform level. On the other hand, transparency at the provider-insurer level could empower insurers to negotiate for lower prices, which would contribute to an overall decrease in healthcare prices. For a transparency initiative at the insurer-provider to have a chance to lower healthcare costs, it must first overcome certain legal obstacles that currently keep price data concealed. B. BARRIERS TO INSURER-PROVIDER PRICE TRANSPARENCY At the insurer-provider level, confidentiality clauses, or gag clauses, in provider-insurer contracts prevent consumers and competing providers from knowing negotiated provider rates. Second, to oppose mandated price transparency or prohibitions on gag clauses, providers and 53 CRS REPORT FOR CONGRESS, supra note 9, at 38 (citing Morten Hviid & H. Peter Møllgaard, Univ. of Copenhagen, Dep t of Econ., Countervailing Power and Price Transparency (Ctr. for Competition & Regulation, Working Paper CCR 01-2, 2001) (arguing when less informed buyers can observe prices negotiated by more informed buyers, sellers are less willing to offer lower prices to the informed buyers)). 54 CRS REPORT FOR CONGRESS, supra note 9, at Id. 56 Id. 57 Cutler & Dafny, supra note Id. at 895; see also CRS REPORT FOR CONGRESS, supra note 9, at 31, 38 39; STEPHEN MARTIN, Chapter 3: Collusion and Tacit Collusion, in INDUSTRIAL ORGANIZATION: A EUROPEAN PERSPECTIVE 49, (2001). 59 MARTIN, supra note 53, at (stating that it is not possible to explain the price increase in terms of demand factors because [d]uring this period, there was no particular boom in the construction industry, the major user of ready-mix concrete ); see also CRS REPORT FOR CONGRESS, supra note 9, at 31, MARTIN, supra note 53, at 57.
11 329 WILLIAM & MARY POLICY REVIEW [VOL. 4:319 insurers may also allege trade secret protection of negotiated prices to prevent disclosure of that information. 1. CONTRACTUAL BARRIERS Contract terms can prevent disclosure of negotiated rates to anyone outside of the contracting parties. 61 This section addresses the barriers to price transparency created by confidentiality clauses, also called gag clauses, and most-favored-nation (MFN) clauses. Gag clauses in contracts between insurance companies and providers currently constitute a significant barrier to third party disclosure of much of the relevant healthcare pricing information. 62 These gag clauses between hospitals and manufacturers of healthcare devices can even keep physicians from knowing true price information about the technology they use every day, 63 leaving some providers without an incentive to contain costs by reducing unnecessary tests and treatments. 64 An MFN clause, on the other hand, is a contractual agreement that prohibits a provider from giving any other insurer a deeper discount than the contracting insurer. Both gag clauses and MFN clauses can thwart transparency efforts and have the effect of unnecessarily raising consumer costs. a. Gag Clauses While some existing price transparency initiatives circumvent these contractual obligations by disclosing cost ranges or gross prices, such figures are not specific enough to be useful for consumers or employers in making purchasing decisions. More specific price information, however, is often subject to gag clauses in contracts between insurers and providers that prohibit the contracting parties from disclosing the negotiated prices with third parties. These gag clauses allow insurers to pay must-have providers, or anchor providers that is, essential providers to a health plan higher than market prices for services, without other providers knowledge. 65 Further, they prevent payers and consumers from knowing the differences in provider-negotiated rates. Without the ability to compare prices, providers, payers, and consumers cannot be sure they are getting a competitive price. Price transparency initiatives to eliminate gag clauses at the insurer-provider level would allow other insurers and providers, who are not parties to the contract, to know the prices their competitors charge or are being charged for specific services. Gag clause prohibitions can produce varied effects depending upon specific market dynamics. In markets with high levels of competition, eliminating gag clauses might give insurers more incentives and leverage, if consumers gravitate toward low-cost, high-quality providers. Under those circumstances, providers will not be able to insist on higher rates unless they have the cost and quality measures to support that demand. However, this model assumes that, in highly competitive healthcare markets, cost and quality information is available, easilyaccessible, and that patients will use it to make healthcare decisions. To date, no data is available to support this assumption. Even worse, in markets without substantial competition, 61 GOV T ACCOUNTABILITY OFFICE, GAO , 15 HEALTH CARE PRICE TRANSPARENCY: MEANINGFUL PRICE INFORMATION IS DIFFICULT FOR CONSUMERS TO OBTAIN PRIOR TO RECEIVING CARE 1 (2011) [hereinafter GAO REPORT ON PRICE TRANSPARENCY]. 62 Jeffrey C. Lerner et al., The Consequences of Secret Prices: The Politics of Physician Preference Items, 27 HEALTH AFF. 1560, 1561 (2008). 63 GOV T ACCOUNTABILITY OFFICE, GAO , MEDICARE: LACK OF PRICE TRANSPARENCY MAY HAMPER HOSPITALS ABILITY TO BE PRUDENT PURCHASERS OF IMPLANTABLE MEDICAL DEVICES (2012). 64 SHANNON BROWNLEE, OVERTREATED: WHY TOO MUCH MEDICINE IS MAKING US SICKER AND POORER (2008). 65 Berenson et al., supra note 24, at 973.
12 2013] CLARIFYING COSTS 330 transparency of prices paid to must-have providers may encourage other providers with as good or better quality measures to demand even higher prices, thereby driving up the cost of healthcare in those markets. Efforts to eliminate gag clauses that target provider and insurer behaviors can translate into lower or higher costs overall. At best, providers might be forced to provide valuable, transparent reasons for charging higher prices, such as quality measures or being the only provider in a healthcare market who offers certain services, or else lower their prices to maintain a profitable patient base. At worst, this might allow competing providers to demand higher prices, driving up costs. 66 Market concentration and the negotiating power of providers must be addressed before price transparency can truly be effective. But identifying this possibility, and the market conditions that create it, can enable policymakers to design around this concern. Unfortunately, successful price transparency initiatives to remove gag clauses may prove more elusive when aimed at affecting consumer choice. Unlike insurers and providers who may have a more complete understanding of codes and healthcare pricing structures, consumers on the whole do not and cannot effectively use information they do not understand. 67 In order for disclosure of insurer-provider negotiated prices and quality information to consumers to help lower healthcare costs, the information must be easily accessible and comprehensible, not simply available. 68 Just as transparency interventions aimed at the insurer-provider level may result in a benefit to consumers by creating lower prices, consumer-level disclosure may, in turn, affect providers and insurers by allowing consumers to demonstrate where their demand lies, thereby creating a more level playing-field for contract negotiations. Returning to the MRI cost example from Part II, a price transparency initiative eliminating the gag clause in the contract between Provider A and Insurer X can create these mutually beneficial results. First, Insurer Y would gain access to the $1,000 rate between Provider A and Insurer X. This would give Insurer Y increased bargaining leverage and allow it to negotiate for a lower rate. Second, eliminating the gag clause would allow individual consumers and employers to comparison shop between Insurer X and Insurer Y. In choosing the insurer with the lowest reimbursement rate, Insurer X, consumers have the ability to increase the demand for Insurer X s rate. This would also give Insurer Y more leverage at the bargaining table to negotiate for a lower rate. Both levels of price transparency, therefore, have the potential to drive down healthcare costs. While disposing of gag clauses may prevent secret deals and selective discounts that lead to escalating costs, some economists believe that price transparency at the provider-payer level could have the opposite effect of actually raising prices charged to patients. Thus, thorough economic analysis of the effects of this type of initiative in different market settings is necessary. b. Most-Favored-Nation Clauses Most-favored-nation (MFN) clauses have also had similar effect on the healthcare market, stifling competition and driving up healthcare costs. 69 In the healthcare market, MFN clauses occur most often when large insurers with substantial market power agree to pay must- 66 See supra Part II. 67 Paul B. Ginsburg, Market Watch: Shopping for Price in Medical Care, HEALTH AFF. WEB EXCLUSIVE, Feb. 6, 2007, at 208, 211 (citing Hibbard & Peters, supra note 38). 68 Kaiser Family Found., Transparency & Complexity (Aug. 13, 2012), transparency-and-complexity.aspx (stating that while simplified assumptions make it easier for health plans to produce coverage illustrations, mis-estimating costs make the price information must less useful to consumers because the effect on the plan differences is masked). 69 Cutler & Dafny, supra note 36, at
13 331 WILLIAM & MARY POLICY REVIEW [VOL. 4:319 have providers a higher than fair price to have them in their network. These agreements can have the effect of setting a minimum price for all medical services covered by the contract. Thus, the cost of such services incurred by a dominant insurer with an MFN clause can become the minimum price for all other competitors in the market that deal with those same providers. 70 As a result, MFN clauses can make it impossible for new insurers to offer a competitive plan in a given market because of the inability to negotiate the same or lower prices with must-have providers. 71 To have a competitive advantage, an insurer must ensure that it pays the lowest price for important providers, not that it pays a low price. As a result, large insurers do not need to use their leverage to negotiate lower costs and can accommodate higher price demands from providers. Any additional costs can be passed on to consumers in the form of higher premiums. In the healthcare market, the existence of MFN clauses in insurer-provider contracts has hindered alternative delivery systems and interfered with competition, causing prices to rise. 72 Like initiatives to prevent MFN clauses, price transparency initiatives would enable large insurers to negotiate to obtain the lowest prices applicable to a must-have group of providers. However, this might cause must-have providers to charge higher prices overall, rather than lowering them. Further, price transparency initiatives would also allow competitor providers to see the higher prices other providers have been able to negotiate and demand to be paid those prices as well, which could drive up the cost of healthcare across the board. However, without price transparency, certain markets may fall prey to great insurer bargaining power. Insurers could continue to offer certain providers lower rates and better camouflage costs, perpetuating arbitrary rates rather than rates that are competitively-driven. Contractual barriers, in the form of gag clauses and MFN clauses, inhibit efforts to increase healthcare price transparency. These barriers exist in large part due to market concentration and increased provider leverage, which in turn can be used to hinder competition and drive up insurance premiums. 73 However, at this stage, economists can only speculate as to the current impact of these clauses on healthcare prices and the effects of prohibiting them on the future of the healthcare market. Greater economic analysis of healthcare market conditions and behavior must be conducted before complete price transparency can be implemented by the prohibition of confidentiality clauses. 2. TRADE SECRET BARRIERS: PRICE INFORMATION AS TRADE SECRETS Confidentiality clauses and agreements in contracts also raise the question of whether healthcare prices that is, the negotiated rates in insurer-provider/hospital contracts are trade secrets, such that insurers could defend against the mandatory disclosure of a price transparency initiative. Trade secret law is determined on a state-by-state basis. To date, 46 states have adopted the Uniform Trade Secrets Act (UTSA). 74 The UTSA was intended to codify section 757 of the 70 James F. Doherty & Monique Ras, Most Favored Nation Clauses in Payor/Provider Agreements, at 3, available at 71 Cutler & Dafny, supra note 36, at Id. at See, e.g., Thomas L. Greaney, Accountable Care Organizations The Fork in the Road, 364 NEW ENG. J. OF MED. E1, E2 (2011); Thomas L. Greaney, Accountable Care Organizations A New Thing with Some Old Problems, 3 HEALTH L. OUTLOOK, 6, 9 (2010). 74 James H. Pooley et al., 1.2 in Overview of California Trade Secrets Law, in Trade Secrets Practice in California, CEB ONLAW (2d ed. 2011). States that have not adopted the UTSA rely on common law based on the Restatement of Torts.
14 2013] CLARIFYING COSTS 332 First Restatement of Torts, 75 which defines a trade secret as including not simply information as to single or ephemeral events in the conduct of the business... [but] a process or device for continuous use in the operation of the business. At common law under Section 757, the continuous use requirement effectively excludes ephemeral events, such as specific sales price information, from protection. The UTSA, however, eliminated the continuous use requirement. This change, arguably, may broaden the definition of what kinds of information can be afforded trade secret protection, so as to include pricing information. 76 The inclusion of price information, however, ultimately remains uncertain in the healthcare market because it has yet to be resolved by the courts. The threshold question in trade secret law must be whether the information is a trade secret. Usually the answer is determined when the holder of an alleged trade secret files a misappropriation claim, alleging that someone or some entity has used or disclosed their trade secret information through improper means. 77 If the information is determined to be a trade secret, that information is protected only against misappropriation. If no trade secret exists, an alleged misappropriator is not liable under the state s UTSA, even if the information was improperly acquired. In terms of possible healthcare price transparency mandates, the analysis will not focus on whether price information has been misappropriated; before such mandates are in place, no misappropriation can occur. Rather, this analysis must preempt a misappropriation claim and examine whether a transparency initiative can force insurers and providers to disclose their pricing information without running afoul of their legal ability to protect their alleged trade secrets. This will depend upon whether pricing information meets the definition of a trade secret. 3. DEFINING PRICE INFORMATION AS A TRADE SECRET The 1984 Uniform Trade Secrets Act defines a trade secret as follows: Trade secret means information, including a formula, pattern, compilation, program, device, method, technique, or process that: (1) Derives independent economic value, actual or potential, from not being generally known to the public or to other person who can obtain economic value from its disclosure or use; and (2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. 78 Whether information is a trade secret is a question of fact; 79 the court will objectively determine whether a trade secret exists. A party s belief that information is secret or contractually confidential may be a factor in the analysis, but is not dispositive. 80 a. First Prong Unknown information with economic value 75 Commissioners Comment to Uniform Trade Secrets Act 1, in TRADE SECRETS: A STATE-BY-STATE SURVEY 986 (Brian M. Malsberger ed., 1st ed. 1997) (stating that the purpose of the Act is to codif[y] the basic principles of common law trade secret protection ). 76 Annemarie Bridy, Trade Secret Prices and High-Tech Devices: How Medical Device Manufacturers Are Seeking to Sustain Profits by Propertizing Prices, 17 TEX. INTELL. PROP. L.J. 187 (2009) (citing Commissioners Comment to UTSA 1, in TRADE SECRETS: A STATE-BY-STATE SURVEY, supra note 80, at 3084, and stating that the purpose of the omission of continuous in the Act is to extend protection to a plaintiff who has not yet had an opportunity... to put a trade secret to use. ). 77 Cal. Civ. Code (b). 78 Id (d). This language comes directly from the U.T.S.A. and is not unique to California. 79 San Jose Const., Inc. v. S.B.C.C., Inc., 155 Cal.App.4th 1528 (2007). 80 Morlife, Inc. v. Perry, 56 Cal. App. 4th 1514, 1522 (1997) (plaintiff's belief); American Paper & Packaging Prods., Inc. v. Kirgan, 183 Cal. App. 3d 1318, 1325 (1986) (contract).
15 333 WILLIAM & MARY POLICY REVIEW [VOL. 4:319 The first prong of the USTA definition is more easily understood when broken down into two separate elements: (a) information not generally known, and (b) independent economic value. Each will be discussed separately, followed by the final definitional prong of secrecy measures, effectively creating a three-part test. (a) Information not generally known. First, the information claimed to be a trade secret must not be generally known or readily ascertainable by business competitors or others to whom the information would have some economic value. 81 A party alleging misappropriation of trade secrets must initially be able to identify the trade secrets with reasonable particularity prior to discovery. 82 This flexible standard requires the party to identify the alleged trade secret in a fair, proper, just and rational manner under all circumstances so that the trial court can control the scope of discovery and allow both parties the opportunity to prepare their case. 83 In certain cases, a court may require the party claiming trade secret protection to separate [the instant subject matter] from matters of general knowledge in the trade or of special knowledge to those persons who are skilled in the trade. 84 A court will often require a party to draw this distinction when the nature of the alleged trade secret makes a detailed description, alone, inadequate to allow the opposing party to learn the limits of the trade secret and to develop defenses, or to allow the court to effectively control the scope of discovery. 85 (b) Independent economic value. The second element of the first prong requires that the information derive value from the fact that it is a secret. The value of the information to a competitor must be substantial; it is insufficient to know that it might have been merely helpful. 86 To determine what value is substantial, it is necessary to compare the alleged secret information to information generally known. 87 This requirement was codified from the common law requirement that a trade secret reflect a competitive advantage, 88 which is especially helpful to insurers and providers wishing to keep their negotiated pricing confidential so as to maintain a competitive advantage against the rest of the market participants. The focus, therefore, is on the greater value of the alleged secret information in comparison to information of general knowledge. Any unrelated value or the value of efforts expended to create the information is not conclusive evidence of substantial value, although both are relevant to the analysis. 89 b. Second Prong Secrecy measures The second prong of the test requires the party alleging secrecy of information to show that they have made reasonable efforts to keep the information secret. To satisfy this prong, the party must show that its secrecy efforts make it difficult for a third party to acquire the 81 Syngenta Crop Protection, Inc. v. Helliker, 138 Cal. App. 4th 1135, 1172 (2006); DVD Copy Control Ass'n, Inc. v. Bunner, 116 Cal. App. 4th 241, 251 (2004). 82 Cal. Civ. Code ; Neothermia Corp. v. Rubicor Medical, Inc., 345 F. Supp. 2d 1042 (N.D. Cal. 2004). 83 Advanced Modular Sputtering, Inc. v. Superior Court, 132 Cal. App. 4th 826 (2005) (rehearing and review denied). 84 Diodes, Inc. v. Franzen, 260 Cal. App. 2d 244, 251, 253 (1968). 85 Discovery is the pre-trial phase of litigation where each party can obtain evidence from the opposing party, including by the taking of depositions and requesting the production of documents. A court must have a sufficient understanding of the parameters of a case in order to rule on what types of information one party may request from the other. 86 Yield Dynamics, Inc. v. Tea Sys. Corp. 154 Cal. App. 4th 547, 567 (2007) (stating software routines only represented trivial value because they or their equivalents could be recreated). 87 Pooley et al., supra note 79, 1.7(C) Independent Economic Value Requirement. 88 Restatement (Third) of Unfair Competition 39, cmt. d, Reporter s Note (1995). 89 Id. 39, cmt. e (value of the information); Courtesy Temp. Serv. V. Camacho, 222 Cal. App. 3d 1278, 1282 (1990) (development expense).
16 2013] CLARIFYING COSTS 334 information, except by improper means. 90 Such efforts include, among others, imposing an obligation of confidentiality, such as a confidentiality clause in a contract, to prevent others from sharing the information. Conversely, information easily obtainable, sold on the open market, or discovered by reverse engineering cannot constitute a trade secret. 91 (1) The effect of the Restatement s and the USTA s definition on the courts Due to the rather amorphous definition provided by the USTA for trade secrets, many courts have referred back to the First Restatement to help narrow what kinds of information can receive trade secret status in other markets. Courts that have decided cases related to commercial transactions and business investments have still invoked the continuous use requirement to exclude ephemeral information and align the definition of trade secrets with the legislative intent of the UTSA. 92 One federal district court in New York concluded that although a company had taken all the necessary measures to maintain the secrecy of its pricing information, prices fluctuate over time in any market and cannot receive trade secret protection. 93 However, since New York has not adopted a version of the UTSA, but only the common law definition of trade secret from Section 757 of the Restatement of Torts, 94 this case may inform, but is not binding as to interpretation of trade secret law in states that have adopted the USTA. Courts in USTA jurisdictions may nonetheless find the New York district court s ruling to be persuasive authority in future cases of first impression. Courts may also deny trade secret designation if the information has been disclosed even to a limited set of individuals. Therefore, price disclosures to customers on an individual basis have been found to evade trade secret protection because of the theory that disclosure would not necessarily end with the individual consumer, but could continue to be disseminated by that consumer to other third parties. 95 These courts reason that once the consumer has possession of allegedly confidential information, the seller s competitor can easily obtain that information from the consumer. 96 This case law seems to suggest that proponents of price transparency could successfully defend against trade secret claims if so much as one line of price data was made available to an individual consumer. In particular, the fact that Aetna has made complete price information available to its members on its website may be enough to withstand a trade secret defense asserted by the insurance company. 97 (2) Pricing in healthcare: unanswered by the courts Two federal district court cases in Minnesota and Pennsylvania attempted to tackle the question of whether healthcare pricing can be protected as a trade secret. In each case, Aspen Healthcare Metrics (Aspen) and Emergency Care Research Institute (ECRI), respectively, urged the court to find that the prices hospitals pay for implantable medical devices manufactured by 90 Clark v. Bunker, 453 F.2d 1006, 1009 (9th Cir 1972) (quoting Restatement of Torts 757, cmt. b (1939)). 91 Cal. Civ. Code (a). 92 Bridy, supra note 81, at Id. at 204 (citing Ivy Mar Co. v. C.R. Seasons Ltd., 907 F. Supp. 547, 558 (E.D.N.Y. 1995) and quoting: Price decisions are made on current competitive information which fluctuates over time in any industry.... Accordingly, that information is not likely to be accorded trade secret status. ). 94 Trade Secrets Law in New York, CITIZEN MEDIA LAW PROJECT (last updated May 6, 2008), available at 95 Bridy, supra note 81, at Id. (citing Economation, Inc. v. Automated Conveyor Systems, Inc., 694 F. Supp. 553, (S.D. Ind. 1988) (Indiana has adopted the UTSA)). 97 See further discussion of Aetna s price transparency initiative in Part IV.B.
17 335 WILLIAM & MARY POLICY REVIEW [VOL. 4:319 Guidant Corporation do not qualify as trade secrets as a matter of law. 98 In opposition, Guidant asserted trade secret protections for the prices paid by hospitals to Guidant for its devices. 99 Each court denied motions for summary judgment, ruling that a genuine issue of material fact remained as to whether Guidant s pricing information met the above three-step analysis. 100 Ultimately, both cases settled on confidential terms before trial, leaving the merits of Guidant s trade secret claims unexamined. Consequently, the proprietary nature of pricing information in the healthcare context remains unresolved. As for the first prong of the trade secret analysis, healthcare pricing information remains unknown and arguably has substantial independent economic value such that politicians, policymakers, and economists alike have long been advocating for increased price transparency in the healthcare market. However, these cases may serve to strengthen the second prong of the trade secret test. The confidential nature of the settlement agreements may serve as further evidence of the companies substantial measures to maintain the concealment of their prices, weighing in favor of affording them trade secret protection. (3) Acquiring price information from government agencies If a state, through legislation or regulation, mandates disclosure or invites voluntary disclosure of pricing information to a government agency, such as its state exchange under the ACA, the state government s ability to share that information with competitor-insurers/providers or the public at large in light of trade secret protections is unknown. In some instances, a company may disclose information to a third party while still maintaining secrecy of the information through contract, such as a gag clause. When the third party is a government agency, however, the analysis becomes more complicated. In California, for example, intentional disclosure of proprietary pricing information by a state agency is governed by the California Public Records Act (CPRA). 101 The CPRA provides that public records are open to inspection by members of the public, unless exempted by law, and must be made promptly available upon request. 102 The law allows individuals to bring actions to enforce disclosure of information if they feel it has been wrongfully withheld. 103 A public record includes any writing retained by any state or local agency, regardless of physical form or characteristics. 104 This definition is intended to cover every conceivable kind of record that is involved in the governmental process and will pertain to any new form of record-keeping instrument as it is developed. 105 As a result, if the state or local government has negotiated with providers for discounted rates on healthcare services, those contracts may be obtainable via 98 Cardiac Pacemakers, Inc. v. Aspen II Holding Co., 413 F. Supp. 2d 1016 (D. Minn. 2006); Emergency Care Research Institute v. Guidant Corp., 2007 U.S. Dist. LEXIS (E.D. Pa. Sept. 12, 2007). 99 Guidant s First Amended Ans. & Counterclaims, Cardiac Pacemakers, 413 F. Supp. 2d at 1028; Emergency Care Research Institute, 2007 U.S. Dist. LEXIS 67658, at *16. Denial of a motion for summary judgment means that both parties alleged enough conflicting facts that the court could not rule on the merits of the case at the pre-trial stage. 101 Gov. Code ; see also San Gabriel Tribune v. Superior Court, 143 Cal. App. 3d 762, 772 (1983). Because the CPRA was modeled after the Freedom of Information Act (FOIA), 5 U.S.C. 552, federal case law can be relied upon to interpret and apply the CPRA. 102 Gov. Code 6252 (b). Members of the public include individual persons, corporations, partnerships, limited liability companies, firms, and associations, as well as public agencies. 103 Id Id (e) (definitions). 105 San Gabriel Tribune v. Superior Court, 143 Cal. App. 3d 762, 774 (1983) (citing Assembly Committee on Statewide Information Policy California Public Records Act of 1968, 1 Appendix to Journal of Assembly 7, Reg. Sess. (1970)).
18 2013] CLARIFYING COSTS 336 CPRA. Further, if California passes legislation or regulation that mandates disclosure of healthcare price information to a government entity, individuals may be able to enforce disclosure of that information which may, in turn, negate a trade secret claim by the owner of that information. Some exemptions to CPRA do exist. While no statutory exemption directly applies to information disclosed pursuant to a state transparency initiative, three kinds of exemptions may apply to healthcare pricing information as well as to trade secrets (q) exemptions, the trade secret exemption, and the catchall exemption. Each could be used by insurers and providers wishing to maintain the secrecy of their individual prices. Section 6254(q) exempts, in part, negotiations with providers of healthcare services by special negotiators who represent the State Medi-Cal program. It also exempts portions of a provider contract with Medi-Cal containing rates of payment for three years from the date of the contract. This and all other exemptions must be narrowly construed. 106 Since no such exemption exists for private insurer negotiations or contract provisions with providers, it seems unlikely that private insurance companies and providers could successfully challenge disclosure of pricing information should it be lawfully retained by the state through a transparency initiative. Furthermore, even if individuals sought to challenge disclosure of information by a government agency, CPRA would not allow them to bring actions to prevent the disclosure. However, the government may appear hypocritical if its agencies collected and disseminated data from private insurance companies, while still maintaining the secrecy of its own healthcare price information. The trade secret exemption prevents disclosure of all trade secrets under CPRA if their disclosure is exempt or prohibited pursuant to federal or state law including the Evidence Code relating to privilege. 107 Although the exemption references only the Evidence Code as basis for trade secret protection, it has been interpreted to incorporate by reference all statutory and common law bases for the protection of trade secrets, including the UTSA. 108 Thus, the analysis returns to the original inquiry to determine whether the information qualifies as a trade secret. The catchall exemption protects confidential information if the public interest served by not disclosing the record clearly outweighs the public interest served by disclosure. 109 Private insurers could contend that the risk of healthcare price increases posed by price transparency is high enough that disclosure of healthcare price information does not serve the public s interest. While reputable data and analysis exist about the possible negative outcomes of price transparency, without more conclusive studies in the healthcare market this argument is unlikely to meet the onerous burden of clearly outweighing the benefit of disclosure. Further, recent case law suggests that it is becoming increasingly difficult to protect proprietary information under the catchall exemption. 110 Finally, local city ordinances may provide additional regulations pertaining to disclosure of proprietary information. San Francisco s Sunshine Ordinance, established by Chapter 67 of 106 Board of Trustees of California State University v. Superior Court, 132 Cal. App. 4th 889 (2005). 107 Gov. Code 6254(k). 108 Pooley et al., supra note 79, 5.22 Trade Secret Exemption (urging that, because the trade secret exemption was enacted prior to the passage of the UTSA, practitioners should not hesitate to argue that the limited the limited scope of the Evidence Code should not apply). 109 Gov. Code 6255(a). See State Bd. of Equalization v. Superior Court, 10 Cal. App. 4th 1177 (1992). 110 See, e.g., County of Santa Clara v. Superior Court, 170 Cal. App. 4th 1301 (2009) (demonstrating that any doubt should be resolved on the side of disclosure).
19 337 WILLIAM & MARY POLICY REVIEW [VOL. 4:319 the San Francisco Administrative Code, is the city s version of the CPRA. 111 Under the Sunshine Ordinance, the Director of Public Health may withhold proposed and final payment rates for managed care contracts for its employees. 112 However, just like the CPRA, this exemption, narrowly interpreted, does not extend to private health insurance contracts with providers and hospitals. The potential for insurers or providers to claim that the specific prices negotiated in their contracts constitute trade secrets could be a substantial barrier to price transparency initiatives. In general, the courts have left substantial uncertainty as to whether healthcare prices deserve trade secret protection. 113 However, in California, the exemptions to CPRA should support an argument against offering trade secret protections to healthcare price information. 114 Further, private entity negotiations under Section 6254(q), combined with a showing that, on balance, public disclosure of healthcare prices weighs in the public s interest under the catch-all exemption, seem to suggest that those entities seeking trade secret protection will have an uphill battle. 115 If California courts affirmatively denied trade secret protection to healthcare price information, such a decision could serve to clarify muddied precedents in other states as well. 4. PROVIDER RESISTANCE In addition to legal barriers created by gag clauses and trade secrets claims, provider resistance may create a substantial barrier to improving the transparency of healthcare prices at the provider-insurer level. Even if the contractual and trade secrets issues were eliminated, provider leverage and resistance have the capacity to render price transparency initiatives ineffective and therefore should be readily addressed in any price transparency initiative. Providers may resist price transparency initiatives mandating public reporting and antitransparency clauses in their contracts. 116 For instance, Aetna s online description of its price transparency initiative cites provider resistance as limiting the extent to which they can make price information available to their members. 117 This resistance to transparency is logical, if physicians are paid on a fee-for-service basis. 118 In a fee-for-service system without transparency, physicians are financially incentivized to order increasing numbers of tests and procedures because most consumers have no way of knowing the costs or the relative benefit of the procedure. In a value-based purchasing system, which the ACA hopes to achieve, price transparency can actually help improve quality of care while lowering costs. For example, providing greater reimbursements for physicians who provide increased preventative care and follow-up visits after certain procedures can shift provider incentives away from quantity of care and toward keeping patients well and out of the doctor s office The San Francisco Sunshine Ordinance (added by Ord , App. 8/18/93; amended by Proposition G, 11/2/99), available at (last accessed Oct. 8, 2012). 112 Id. at Sec (e)(2). 113 See Cardiac Pacemakers, supra note 103 (where the lawsuit settled before the court could decide the trade secret claim), and Nunes v. The Hospital Committee for Livermore-Pleasanton Areas (Cal. Ct. App., May 29, 2012, A131060) 2012 WL (an unreported case where, similarly, the court ruled on a motion for summary judgment before tackling the question of alleged trade secret protection). 114 See Gov. Code 6254(q), (k) and 6255(a). 115 Gov. Code 6254(q); GAO REPORT ON PRICE TRANSPARENCY, supra note 67, at GAO REPORT ON PRICE TRANSPARENCY, supra note 67, at Id. at 22; see also Aetna s Healthcare Cost Transparency Tools, (last visited Sept. 24, 2012). 118 BROWNLEE, supra note Id.
20 2013] CLARIFYING COSTS 338 Not all providers oppose price transparency. Some have spoken out in favor of it. In written comments prepared for the August 25, 2012 California Health Benefit Exchange Board Meeting, insurers, provider groups, and other healthcare advocacy groups who partner with providers expressed their support for the exchange staff s recommendation to prohibit antitransparency clauses (gag clauses) in insurer-provider contracts. 120 Their support for transparency incorporated all of the above-mentioned intended effects, including cost-savings and creating well-informed consumers as a way to drive consumerism and lower prices. Although price transparency has seen some support from provider groups, in most instances, those seeking to advance a price transparency initiative should be prepared for resistance from providers. V. EMPLOYER-LEVEL PRICE TRANSPARENCY Employers represent a third target group for potential price transparency initiatives aimed at decreasing healthcare spending. At a time when employers are facing a number of long-term challenges, such as controlling costs, improving employee engagement and accountability, and determining how to comply with new healthcare reform legislation, price transparency initiatives targeting employers that either purchase health insurance or healthcare services directly from providers have great potential to reduce overall healthcare costs. 121 Employers become consumers of healthcare when they contract with insurers to offer health plans to employees. If employers could obtain both quality information on the providers included in a health plan as well as the negotiated prices, they could begin to use their leverage as purchasers to demand higher value plans and avoid plans that pay inflated rates to certain providers. Knowledge of insurer-negotiated prices will also enable self-insured employers to demand lower prices and develop networks of high value providers. Employers, especially large, self-insured employers, are in a better position to accumulate and analyze price and quality data than individual consumers and they also have the ability to leverage their employees purchasing power to negotiate price. Further, groups of like-minded employers, like the Leap Frog Group or The Pacific Business Group on Health, may have an even greater ability to leverage their position to insist on higher value plans. 122 More so than individual consumers, or even insurers and providers, employers are uniquely situated to have a game-changing impact on the way price transparency can affect the healthcare system. 120 Stakeholder Input: Qualified Health Plan Policies and Strategies to Improve Care, Prevention and Affordability, CALIFORNIA HEALTH BENEFIT EXCHANGE, Aug. 10, 2012, available at BoardMeetings/Documents/August_23_2012/IX_StakeholderConsolidatedCommentsQHPPoliciesandStrategies_ pdf. Those expressing support of prohibiting anti-transparency clauses in provider contracts included the California Pan-Ethnic Health Network, Castlight Health, Health Access, VSP Vision Care, Pacific Business Group on Health, Blue Shield of California. However, Blue Shield of California believes it is too soon to address contract regulation because (a) providers will resist, and (b) it is too soon before apps for QHPs are due to change any existing contracts. The lone group in opposition was the California Medical Association, due to a worry about a lack of concomitant provider protections and no way to protect providers from inaccurate and unfair reporting. 121 See infra PartVI.D. 122 See The Leapfrog Group, and The Pacific Business Group on Health,
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